- Sovereign yields continue to fall spurred by safe-haven buying and central banks
- Gilt curve pivots, as inflation worries battle with economic-growth concerns
- Flight to quality reduces portfolio risk
Sovereign yields continue to fall spurred by safe-haven buying and central banks
Sovereign yields around the globe continued their downward trend in the week ending July 16, 2021, driven by a mixture of safe-haven buying and central-bank reassurances. The 10-year US Treasury yield fell 6 basis points, taking the total decline over the past three weeks to almost a quarter of a percent. The demand for high-quality government debt was once again prompted by growing concerns over the rapid spread of the Covid Delta variant and its impact on the global economy, which triggered the first weekly stock-market loss in nearly a month. The renewed uptick in US headline inflation to 5.4% for the 12 months ending in June led to only a temporary uptick in bond yields, as Federal Reserve Chairman Jay Powell, in his semi-annual monetary-policy report to Congress on Wednesday, once more reiterated the central bank’s stance that the recent inflationary pressures will prove transient.
Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated July 16, 2021) for further details.
Gilt curve pivots, as inflation worries battle with economic-growth concerns
The British government curve pivoted around its 7-year point in the week ending July 16, 2021, as short and medium-term yields were raised by an upward surprise in realized inflation, while the long end followed US Treasury and German Bund rates lower. The 2-year to 5-year maturities climbed 4 basis points, following the release of UK consumer-price growth for June, which came in at 2.5%—compared with a consensus forecast of 2.2% and up 0.4% from the previous month. Derivatives markets reacted by bringing forward the predicted rise in the Bank of England’s base rate to 0.25% by six months to November 2022. Longer-dated yields, in contrast, fell between 6 and 7 basis points, pushed down by the same economic-growth concerns as their American and continental European counterparts.
Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated July 16, 2021) for further details.
Flight to quality reduces portfolio risk
Short-term risk in Qontigo’s global multi-asset class model portfolio fell another 0.6% to 5.1% as of Friday, July 16, 2021, due to a combination of lower equity and FX volatility. Non-US equities—developed and emerging-market—experienced the biggest drop in risk contributions, accounting for one third of the decline in overall portfolio volatility. The renewed countermovement of stock and bond prices provided additional diversification benefits, accounting for another 0.24% of the total risk reduction. US investment-grade corporates were, however, the biggest beneficiaries in terms of percentage risk contribution, as they saw their share of overall volatility fall by 1.6 percentage points to 2.5%. This was due to a negative correlation of credit-spread returns with both share and government-bond prices.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated July 16, 2021) for further details.